Week in Review – Friday May 1st, 2020

It has certainly been interesting times. Confounding most experts, the market roared back in April even as COVID-19 continued to wreak mortal and economic havoc with death tolls rising, stay-in-place orders mostly continuing and millions losing their jobs. After an April that was the best month for the S&P 500 Index (SPX) since January 1987 (up +12.7%), SPX finished the week slightly down –0.19%.

Interest rates were stable with little volatility as the U.S.10-year Treasury note traded in the low to mid 60 bps. With the Fed “foaming the runway” for issuers, demand for corporate debt continued to surprise, even with issuers whose future remained cloudy at best. Boeing is the best example, raising $25 billion across a range of maturities on Thursday – oversubscribed by a factor of 3x according to reports. So successful, in fact, that Boeing decided not to seek government aid.

After taking a substantial leg lower earlier in the week to the low 30s, volatility (as measured by the VIX Index) picked up again on Thursday and Friday, finishing the week up +3.5% to 37.2. With concerns about future inflation growing, Gold continued its climb in April with the spot price up +5.8% — up +12.4% for the year. After a horrible run a week earlier, WTI Oil recovered, trading up +23.3% to $19.78/barrel. While there were signs of supply curtailment and demand rising slightly off of extreme lows, the near-term outlook for the commodity and its producers remains bleak.

From an equity perspective, earlier in the week we saw lower quality stocks (directly in the line of fire from COVID-19, questionable balance sheets, growth challenged) stage a massive relative comeback and higher quality stocks (better secular growth, better balance sheets, lots of free cash flow) falter. In other words, investors suspended reality and bought the YTD losers and sold the YTD winners. According to Bespoke Investments, this can be seen in the sector performance data from the highs of February 19th through Monday versus Tuesday, April 28th.

This also coincided with the enthusiasm around the slow selective opening of the economy in certain states and the successful initial trial of Gilead’s therapeutic, Remdesivir, which was specifically touted by Dr. Fauci after conflicting reports on its effectiveness last week. Thursday and Friday largely unwound this short term trend as stunningly bad economic data and disappointing earnings guidance hit stocks hard.

Speaking of earnings – they were particularly in focus this week with stalwarts like Amazon, Apple, Microsoft, Google, Facebook, Gilead and others reporting quarterly earnings. Generally, for larger names, results were better than expected for the first quarter, but management teams remained cautious about the future – with many pulling guidance for the current quarter and/or the rest of the year. The reactions to stock price were somewhat predictable, in general terms. If a company had been a beneficiary of COVID-19 chaos and substantially outperformed the market YTD, it likely went down after earnings as expectations were very high. Amazon is the best example, up 33.9% YTD prior to release of earnings after-market on Thursday and down –7.6% on Friday. If, on the other hand, a company had been directly and/or indirectly negatively impacted by COVID-19 and had underperformed, it likely rose after earnings as things turned out not to be as bad as expected. Facebook and Google are the best examples of this phenomenon. After being down –8.0% YTD, Google rose +8.9% Wednesday after reporting earnings after-market on Tuesday. Similarly, after being down –5.4% YTD, Facebook rose +5.4% Thursday after reporting earnings after-market on Wednesday.

Finally, economic data released during the week was downright horrible. First Quarter GDP came in at –4.8%, below expectations of –4.0%. However, somewhat surprisingly given that we are immersed in a global health crisis, nearly half of the drop was related to a decline in healthcare spending.

It appears that many have put off — or rather have been forced to put off – elective and non-urgent medical procedures. In fact, some pharma and medical device companies had already mentioned this on their earnings calls. Ironically, this has occurred even as hospitals in most states around the country remain well underutilized in anticipation of a flood of patients from COVID-19 that never materialized – at least not yet (for which we are all grateful). New York is an obvious exception to this observation. That said, there was a report this week that suggested that mismanagement may have been the source of some of New York’s troubles as some hospital beds and ventilators have gone unused. In any case, we would expect that much of this pent-up demand will eventually materialize, positively impacting future GDP. To that end, California just announced last week that it allow certain medical procedures to resume once again at its hospitals.

Further notable negative economic news included the following:

According to the Department of Labor, another 3.8 million people filing initial claims for unemployment benefits last week, bringing the total unemployed since the beginning of the COVID-19 crisis to more than 30 million;

Consumer spending falling –5% in March from a month earlier (vs. a –3.6% expectation) — the biggest monthly drop on record; and

The ISM purchasing manager index and the IHS Markit PMI coming in with April 2020 numbers of 41.5 and 36.1, respectively — both well below 50, which signals contraction.

The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of May 2020 and are provided for informational purposes only. Investing involves risk, loss of principal is possible. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional.

This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.

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